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The Block Shocks – the reality of property renovations

The Block was once again a hugely popular TV show.

Three gruelling months of sleeplessness and renovations paid off handsomely for two teams but the others failed to achieved the desired results teaching a group of would be overnight property moguls that there is no such thing as get rich quick in property.

While two teams pocketed more than $300,000 each, one team took home $40,000 and two teams earned a paltry $10,000 for their weeks of backbreaking work.

The results may be shocking to some, but not to those who understand the risks involved in renovating and property development.

block building

Now don’t get me wrong –all properties sold on the day at what I think were fair market prices, so in that regard The Block was a success.

But if you ran The Block as a business and added stamp duty, buying and selling costs, interest for the holding period and payments for labour, there was no commercial profit in doing these renovations. 

But then we know that Reality TV is not “real life” don’t we?

There’s nothing new about this -you can’t make money in renovations with a buy renovate and sell strategy. Especially if you break all the rules of property investment.

Are renovations a good strategy?

Let me be clear – I think renos are a great property investment strategy. They increase the value of your property, make it more appealing to tenants, increase the rents and manufacture depreciation allowances.

However the concept of The Block is to make money out of renovating for a quick profit.

This is too risky – my strategy is to buy, renovate, refinance and hold for the long term. It’s just too hard to make money out of a “buy, renovate and sell” strategy.

So what went wrong with The Block?

I feel they broke many of the rules of successful property investment:

  1. The wrong location. Clearly the location was secondary – a busy main road in the worst part of a good suburb.thumbs down bad
    I would have chosen a suburb where there are plenty of deep-pocketed downsizing Baby Boomers prepared to pay a premium to live.
    In today’s fragmented property markets, choosing the best location you can afford is more critical than ever.
    Location has always been paramount in smart property decisions and The Block showed that glitzy interiors can’t always make up for poor locations.
  2. The wrong property for that location – the predominant demographic in that areas are students and Generation Y looking for one and two-bedroom properties, not multimillion dollar three story apartments.
  3. The wrong price – the median price in the areas for 2 bedroom apartments is $560,000 and $829,000 for 3 bedroom apartments.
    With very few people looking for two million-dollar properties in Prahran, it’s lucky that all the properties sold under the hammer.
  4. The wrong budget – the blockheads made the fundamental flaw of overcapitalizing and renovating to their own personal taste rather that to the requirements of their target market.

What lessons can we learn?

So how do you ensure you don’t end up over-capitalising, as many investors do?

Here are four rules to follow to make the most of a “renovate-for-profit” property investment:

1) Determine the “right” purchase price.

Buying a renovator’s delight at the right price is crucial in ensuring you are going to make some money when you finish your refurbishments.

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If you pay too much for your property at the outset, you will be chasing your tail trying to make the refurbishment profitable.

Start by determining what the end value of the property will be when you have completed all planned works. You can do this by researching the value of similarly renovated properties in your area.

Once you have the end value in mind, draw up an initial project budget to calculate your approximate renovation expenses.

You should also consider getting a building and pest inspection on the property so you know exactly what you’re getting yourself into, to help plan your budget accordingly.

The Block came across an unexpected underground petrol tank that would have blown the budget of ordinary investors.

Now, subtract all your costs from the end value, allow for a profit margin and this will give you a fair idea of how much you can afford to pay for your property in order to make your investment financially viable.

2) Be realistic with your budget

Fact is, the job will usually cost more than you expect and take longer than you planned. With today’s shortage of good labour, it’s hard to get tradespeople to quote on renovation jobs.Budget

We’ve all heard stories of how the budget blew out and the project took weeks longer than expected.

It’s never as easy as they make it look on TV. And, funnily enough, the tradespeople never look as good as they do on the shows either. I am yet to encounter a tradesperson wearing neatly pressed overalls!

3) Consider the type of tenant / owner you wish to attract

Think about the type of tenants you want to lease your property to and renovate with them in mind.

Talk to your property manager to determine the predominant demographic seeking accommodation in the area and plan your renovations accordingly.

If you’re planning to sell, target your end product for a wide demographic, not a narrow spectrum of potential buyers.

4) Don’t get personal!

Another mistake I see investors make is that they become too personal about the renovation project they are undertaking.whats ahead

Remember, you won’t be living in the place; so putting your own personality into the property is not necessarily a good idea.

If you keep things simple and the decor neutral, to simply make the property liveable and functional, you can’t go wrong.

Property renovating is not a license to print money.

The results on The Block are evidence of the reality of what can happen when renovating for profit. It’s hard work, but it’s a great way to increase your rental returns and manufacture capital growth to boost your property investment profits.

To be successful you need to understand the importance of location, your target market, the competition of other stock in the marketplace and avoid over capitalising.

How can you put this into practice?

If you’re considering getting started in property renovations or development, these are areas the team at Metropole specialise in.

Remember the multi award winning team of property investment strategists at Metropole have no properties on the market to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat.

Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'The Block Shocks – the reality of property renovations' have 2 comments

  1. Avatar for Property Update

    October 17, 2014 @ 10:02 pm mike

    Thanks Michael, always interesting to read your thoughts and theories. Just wondering if you think the apartments would have made good investments for the people who purchased them? Based on approximate rent of $1,750 per week and $1,200 approx. depreciation per week, even the most expensive appartment was yielding around 8% gross? For mind, max and karstans being the largest apartment, north facing and cheaper than the others seemed a reasonable investment?

    Reply

    • Avatar for Property Update

      October 17, 2014 @ 10:55 pm Michael Yardney

      Mike – the return is not 8% gross. You can’t factor in depreciation into net return.
      The important factor is that there is a very, very limited market of tenants who want to pay that type of rent in that location

      Reply


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